Why the Income Tax is Bad for America

“Little else is required to carry a state to the highest degree of opulence but peace, easy taxes, and a tolerable administration of justice.” — Adam Smith

“If everyone enjoyed the unrestricted use of his faculties and the free disposition of the fruits of his labor, social progress would be ceaseless, uninterrupted, and unfailing.” — Frederic Bastiat, “The Law” (1850)

“A virtuous and industrious people may be cheaply governed.” — Benjamin Franklin

I quote these three statements at the beginning of chapters 20 and 21 of my textbook, “Economic Logic.” Click here to order. These chapters deal with the vital issues of the role of government and how to pay for it.

Last Sunday (Feb. 4), 100 years ago, the Secretary of State declared that the 16th amendment was approved by 36 states to make the federal income tax the law of the land (even though many states violated their own constitutions to ratify the 16th amendment).

There is no doubt that the federal income tax has allowed the government to grow dramatically in the past 100 years. Along with the creation of the Federal Reserve, the engine of inflation that also started in 1913, the income tax has financed several world wars, the welfare state, and the regulatory state. Before the income tax, the government relied primarily on property taxes, user fees and import duties to finance government operations.

The income tax is flawed for a number of reasons — it discourages economic growth and encourages a bloated government.

The true principle of taxation is the benefit principle — those who benefit from a government service should pay for it. It’s also known as the “user pay” principle. Every effort should be made to link the payment of taxes or fees to the cost associated with the government service.

With few exceptions, taxes should not be based on ability to pay or the sacrifice principle.

It’s true that wealthy citizens usually can afford to pay more taxes on their incomes and investments (dividends and capital gains). But that’s not necessarily good policy. Who uses funds more productively — private citizens or the government? I dare say that Warren Buffett can use his surplus funds more effectively in private business and creating jobs than the government can.

In honor of the 100th anniversary of the 16th amendment, we are having a panel debate on the federal income tax at this year’s FreedomFest (see below for a special announcement): “In Search of the Ideal: Fair Tax, Flat Tax, No Tax?” with top libertarian tax experts Art Laffer, Richard Rahn and Steve Moore.

The Federal Reserve, the engine of inflation, also was established in 1913 — we also are going to have a FreedomFest session on “End the Fed? Now What?” with debates on the gold standard, free banking or a monetary rule. Don’t miss it.

You Blew It! Waste and Pork in $50 Billion Relief Act

Will the president and Congress ever get serious about the deficit?

Last week, Congress and Obama pushed through the Disaster Relief Appropriations Act of 2013 and approved $50.5 billion in “relief” funds for the Hurricane Sandy victims. What a joke, and New Jersey Gov. Chris Christy should be ashamed of supporting this pork legislation.

Passed by a 62-to-36 vote margin in the Senate, the bill was signed into law by President Obama on Jan. 29. Officially, the new funds will help towns and cities affected by Hurricane Sandy to be reimbursed for some percentage of the costs borne in responding to the storm, such as debris cleanup and overtime for police officers and staff.

In reality, billions will go toward projects unrelated to the hurricane-damaged region. The act provides $150 million for Alaskan fisheries, $8 million for homeland security and the Transportation Security Administration (TSA) to buy new cars, office equipment, furniture and “mobile X-Ray machines,” and $41 million for eight military bases including Guantanamo Bay in Cuba. Other expenditures include: $4 million to the Kennedy Space Center in Florida for repairing sand dunes; $2 million to repair museum roofs of the Smithsonian Institute in Washington, D.C.; $1 million to repair national cemeteries; and a whopping $13 billion to prevent future storm damage, including tree planting to “help reduce flood effects, protect water sources, decrease soil erosion and improve wildlife habitat.”

Fraud is common when you give away billions. Fraud related to Hurricane Katrina spending is estimated to top $2 billion. In addition, debit cards provided to hurricane victims were used to pay for Caribbean vacations, NFL tickets, Dom Perignon champagne, “Girls Gone Wild” videos, and at least one sex change operation.

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.

Upcoming Appearances

Big News! John Stossel Coming to FreedomFest!

• We are happy to announce that John Stossel will be taping a special edition of his Fox Business show, STOSSEL, at FreedomFest on Thursday, July 11, 2013 (just think 7-11). And you all are invited! John will be drawing from our list of great speakers for his show, including Steve Forbes, Art Laffer, Jim Rogers, Steve Moore, Charles Murray and many more. Sign up now at www.freedomfest.com or call Tami Holland at 1-866/266-5101, and take advantage of the early bird special, $100 off per person/$200 per couple (ends March 15). As a FreedomFest attendee, you will receive a complimentary ticket to the STOSSEL show and preferred seating. I’m excited to have a major TV network at FreedomFest for the first time. Don’t miss out.

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About Mark Skousen

Mark Skousen, Ph. D., is the editor of the monthly investment newsletter, Forecasts & Strategies, as well as three weekly trading services, Skousen High-Income Alert, Hedge Fund Trader and Fast Money Alert. He also is a professional economist, investment expert, university professor, and author of more than 25 books. He earned his Ph. D. in monetary economics at George Washington University in 1977. He has taught economics and finance at Columbia Business School, Columbia University, Grantham University, Barnard College, Mercy College, Rollins College and as a Presidential Fellow at Chapman University. He also has been a consultant to IBM, Hutchinson Technology and other Fortune 500 companies.

With decades of Wall Street experience, we publish investment newsletters and website articles offering advice on the best stocks, options, ETFs and mutual funds to invest in for both dividends and capital gains.